What Is a Smart Contract?
Initially proposed by the American computer scientist Nick Szabo, smart contracts are typically employed to automate the terms of an agreement. In other words, the difference between a traditional contract and a smart contract is that a traditional contract is enforced by central authorities and a legal system, while the terms of a smart contract are enforced using lines of code.
With this design, smart contracts actively reduce the need for trusted intermediaries, enforcement costs, fraud losses, and malicious or accidental exceptions.
These advantages, in return, have enabled developers and programmers to build a variety of decentralised apps (dapps) and projects with specific use cases. For example, smart contracts have become the foundation for financial tools, data recording, insurance, supply chain management, and escrow activities.
How Do Smart Contracts Work?
Think of smart contracts as digital ‘if-then’ statements between two or more parties. If one party’s requirements are met, then the agreement can be fulfilled and a network of computers executes the contract.
Similar to traditional contracts, smart contracts first need to meet the terms and conditions, as well as the terms of completion, between two or more parties. Once this is established, the items are written into a smart contract, which is encrypted and stored on a certain blockchain.
Upon the completion of the transaction, the blockchain is then updated with the latest information. This means that the transaction cannot be changed, and only the parties with specific permission may view the results.